Goldman Sachs Reports $3.5B Profit Amid SEC's Fraud Charges

Goldman Sachs today posted hefty profits just as the embattled banking giant is fighting to save its most valuable commodity -- its clients' trust.

Goldman Sachs reported that it raked in $3.46 billion in profits on $12.78 billion in net revenues during the first three months of the year. The $5.59 a share earnings beat expectations by Wall Street analysts, who predicted $4 a share in profit.

It's a number the bank hopes will ease worries among investors, jittery about allegations by the Securities and Exchange Commission that Goldman Sachs knowingly duped investors. Federal regulators Friday charged the investment bank with fraud over the sale of risky subprime mortgage securities that were secretly designed to fail, costing investors $1 billion.

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The Case Against Goldman Sachs

Even though the profit may ease investor worries, experts say it could also incite public anger.

"Their reputation is at stake. Ironically, if there was a day that Goldman Sachs wishes that their results were not so good, it'd probably be today," Suzy Welch, business and economic issues contributor for ABC News, told "Good Morning America's" George Stephanopoulos today. "What makes people mad in the first place is the fact that Goldman makes so much money and perhaps profited off of other people's suffering, and here they are making more money. Could it get more outrageous?"

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Goldman Sachs Fights Fraud Charges

In a letter to clients Monday, Goldman Sachs called the SEC probe "completely unfounded." The bank's CEO, Lloyd Blankfein, even left a voicemail on employees' phones over the weekend to boost morale.

"This is Lloyd on Sunday in New York. Following my message to you on Friday, I wanted to update all of you and let you know that we have been taking all appropriate steps to defend the firm and its reputation," he said in the voice mail.

The purpose of the voice mails, Goldman Sachs officials told ABC News, was to inform employees about the firm's reaction to the charges and to keep them focused on the task at hand: servicing Goldman's clients. But officials are also trying to boost morale at a crucial time for the bank.

Some are calling for Blankfein to resign amid these fresh allegations, but that's unlikely to happen.

"I don't think it's going to happen in the near term," Welch said. "I think the board is behind him and I think that Goldman would fear that if Lloyd Blankfein went, they would be in a way admitting that something wrong happened there."

Blankfein is set to testify before a Senate panel on April 27, and SEC commissioner Mary L. Schapiro is expected to appear before lawmakers today.

Goldman Sachs has tapped the legal expertise of former White House counsel Greg Craig to fight the domestic charges.

Meanwhile, UK's regulatory agency Financial Services Authority said it will also begin a "formal enforcement investigation" into another alleged fraud scheme by the banking giant that may have cost the Royal Bank of Scotland Group millions of dollars.

SEC Files Lawsuit Against Goldman Sachs

SEC executives said in an earnings conference call today that they were taken by surprise by the SEC's charges.

"We were somewhat surprised that this was filed as complaint and no one told us in advance," said David A. Viniar, chief financial officer of Goldman Sachs.

The SEC claims Goldman Sachs sold investors a faulty mortgage product without telling those investors that another client actually helped engineer it to fail, and that he was banking against it. The securities were bundled up and sold to investors, who were told the mortgages had been picked by an independent third party.

The SEC argues that the client, hedge fund chief John Paulson, then made $1 billion as other investors lost more than $1 billion. Goldman Sachs received $15 million for brokering the transaction.

The SEC "charged that Goldman failed to make adequate disclosures on the role that Paulson & Co. played in selecting the portfolio," the SEC's enforcement director Robert Khuzami said on a conference call Monday. Paulson & Co. wasn't charged because the hedge fund did not make representations to investors, the SEC said.

Goldman issued a lengthy statement on its Web site, asserting that its losing $90 million on the deal proves it did not design a ticking time bomb.

"There were also collateral securities that we managed on which we lost money and other aspects of the transaction," Viniar said today. "When you added them all up, the net loss losses to Goldman Sachs were over $100 million."

Goldman has also flatly denied a key point, that Goldman misled ACA Management, the money manager it assigned to the deal. The SEC said Goldman, in arranging for Paulson to assist ACA in selecting the mortgages that went into the deal, told ACA that Paulson would be a long investor, when his intent was to short the deal, in effect betting against it. Goldman said it never told ACA that Paulson would be a long investor.

"We simply do not believe that the evidence cited by the SEC demonstrates that ACA was misled into believing that Paulson was going to be buying an equity position, and the term sheets and offering certainly did not reflect an equity tranche," said Greg Palm, Goldman Sachs' general counsel.

"We would never intentionally mislead anyone," Palm added.

The question, said Wall Street Journal's John Hilsenrath, is whether Goldman Sachs was unfairly favoring one investor group over another.

"It is very complicated," he said on "GMA." "That is why the SEC was split on it."

The one individual singled out in SEC's complaint is 31-year-old vice president Fabrice Tourre. The Stanford-based Frenchman has decided to take time off of work, but he remains on the company's payroll, sources at Goldman Sachs told ABC News.

The SEC alleges that Tourre knew what he was doing wrong, and bragged about it in a 2007 e-mail to a friend.

"More and more leverage in the system, the whole building is about to collapse anytime now," he allegedly wrote. "Only potential survivor, the fabulous Fab ... standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"

In Washington, Democrats are banking on the scandal to support their financial reform bill, opposed unanimously by the GOP. Hilsenrath says Republicans are going to have a tough time arguing against a reform bill in the face of such charges and that more such cases are likely to emerge.

"At the end of the day, I think this is just the beginning of a process for the SEC," Hilsenrath said. "I think they've got more cases coming down the road. Goldman wasn't the only firm that was doing these kinds of trades. And I wouldn't be surprised to see them rolling out more cases in the next few days."

Duff McDonald, journalist and author of Last Man Standing, agrees.

"Regulators, politicians, the public are out for scalps and Goldman is the biggest scalp of all," he told ABC News.